Why do insurers allow advisers to choose ARF commission rate?

Marc said:

dalbar - this is the difference between time weighted and money weighted returns.

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Dalbar's errors were much more serious than that. Yes they used a money weighted versus time weighted calculation. Both calculations are valid but they are not comparing apples with apples. The history was that the best returns (annualised) were by the early punters and in money terms there were less early punters than later punters. The math then showed that money weighted annualised returns were worse than time weighted. All that says is that later punters did worse than earlier ones and there were more of them. The conclusion was wrong of course that this meant that in aggregate punters do worse than the market. That is a mathematical contradiction. One woman's purchase of a share is another's sale. In aggregate they do as well as the market in money weighted terms by definition. But of course it is a bit of a coincidence that the erroneous conclusion is exactly what the troops want to hear. So much so that when the fallacy is pointed out they shoot the messenger.

But the really unforgivable error of Dalbar which simply shows them up as hopeless amateurs goes as follows - in a simplified illustration.
Lets say returns are 10% p.a. and let's ignore compounding to simplify the point. Then 100 invested for 10 years will earn 100. But 10 invested every year is, let's say approximately, 100 invested for 5 years and earns only 50. The Dalbar school of math looks at this latter picture and says it is no different from the first. 100 was invested over 10 years but only earned 50, which is 5% p.a. I know the faithful don't want to believe it but that's exactly what they did.

It has been alleged here that intermediaries have made far more from their ARFs that their clients in the last 10 years. It's very similar to something that was said in another recent thread but the time scale was 5/7 years. When asked to provide evidence or an example of that, both posters have declined to do so. If anyone wants to fact-check that they can go to any ARF providers website and use the fund growt/performance calculators that are provided.

The basis of both allegations appears to be a 2015 Society of Actuaries report that stated that 44% of reported AUM were in Cash/Protected Funds and therefore those ARF holders can't be making money because the AMCs are greater than 'Cash' returns.

The Society of Actuaries, whose members run the ARF business, couldn't get more than 50% of their members to provide a breakdown of the AUM in ARFs. If those lads and lassies can't get their members to play ball and furnish figures then I doubt anyone else will. So, that's a bit skewed for a start. If an large insurer, that provided information, had a bias towards a capital protected ARF product at that time it would throw the figures out. But, there's also the fact that Fixed Rate Term Deposits were popular back in 2011/2012. Some of my clients demanded those. Those clients are now in multi-asset funds that have between 0% & 10% in cash.

It's likely that ARF providers don't want to share, what they would probably consider commercially sensitive information, with collators of reports. In the absence of that information an intermediary can look at ther own book of business (AUM) and see what funds their execution only and advisory clients are invested in. Again, you find the same thing - Top 5 Funds have 0% - 10% in Cash.

If you are going to ask your friend how their ARF has done over the last 10 years, and they say it's dropping in value, it may be because the date on their statement valuation coincides with, say, a 10% drop in the markets but by the time they got the statement the market had risen by 20% (this happened last year with the bi-annual PRSA statements). Folk don't check values, all the time. Also, folk 'forget' that they're taking 4%/5%+ from their ARFs every year and maybe (just maybe) after 10 years their original €112,500 is currently valued at €112,000.

Gerard

www.prsa.ie

GSheehy said:

The basis of both allegations appears to be a 2015 Society of Actuaries report that stated that 44% of reported AUM were in Cash/Protected Funds and therefore those ARF holders can't be making money because the AMCs are greater than 'Cash' returns.

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I agree that it's ridiculous that the industry hasn't produced more recent figures on the asset distribution of ARF's. Hopefully Insurance Ireland will have someone watching this thread and nail the lie, if that's what it is. Do you think they will?

The conclusions from the Society of Actuaries survey are in line with the advice of experienced brokers like @Marc who contributes regularly on this forum. He is constantly denouncing contributors who invest heavily in equities, saying that they are being reckless and risk running out of money prematurely. I am sure that his advice is fairly typical of the broker community. All you need to do is go back through various threads on this forum, where people ask for, or offer, advice on where they should invest their ARF money.

In my experience, intermediaries are happy to recommend an equity-heavy ARF for people who already have a DB pension and for whom the ARF is pin money, but they advise a far more cautious approach for people with large DC pots, for whom the ARF will be their main source of income. That is what the future will look like for everyone.

I take it that you agree that, for a client with a reasonably conservative asset profile, the intermediary's remuneration could exceed what the client makes from the ARF. Therefore, the only disagreement is over the actual distribution of ARF assets. There we are both in the dark, unfortunately.

So, just to be very clear on this point. Our advice is certainly not typical of the broker community.

Personally I think the issue here stems from brokers (and tied agents in banks) having an over reliance on risk profile questionnaires to test a client's risk tolerance when what they should be testing is a more objective measure of capacity to bear losses. (the point about having AVCs and a DB pension - then yes, you objectively have more risk capacity)



I took great exception to the thread where a 100% Equity strategy was being touted as "something to consider". Its not a suitable investment strategy for an ARF for most people. That was my point. Just that

However, I consistently argue that, equally, a very conservative investment strategy (ESMA 2, 3 or even 4) is also wholly unsuitable for an ARF investment.



We estimate that the amount of investors cash held across these strategies is almost €10 Billion. Now we don't know the split between pre and post retirement but it really doesn't matter. Its not really suitable for pre-retirement savings to be in such conservative strategies and it clearly doesn't work for an ARF. So, broadly speaking nobody should have any money in any of these.

HM Treasury commissioned a review a while back now by Ron Sandler (https://en.wikipedia.org/wiki/Sandler_Review) in which the phrase "reckless conservatism" was coined to describe the investing decisions of a very large proportion of the UK investing public.

This is the original "bootstrap" analysis I did 10 years ago now and referenced in our guide on this subject





Clearly, the all cash portfolio resulted in a lower inheritance for the investor’s heirs.

However, equally revealing is the fact that when we add in the stream of income payments, we see that the cash strategy also provided the lowest cumulative income payments for an investor themselves.







And here is the ex post performance of those strategies since our first Irish client invested back in Sept 2008 assuming a 4%pa withdrawal paid monthly on the 1st month




Investing in an ARF carries higher risk than annuity purchase as the fund remains invested and may fall as well as rise in value. This in turn may lead to the client receiving less income than they expect.

For some clients this is unacceptable. However, as we have seen, pursuing a deposit-based investment strategy within an ARF to avoid investment risk does not guarantee a better outcome and depending on how long the client lives, an Annuity may work out to be better value overall.

Some clients, in the face of a decline in the value of their ARF may subsequently elect to switch to an annuity part way through their retirement; some of these may discover that they would have been better off buying an annuity at outset.

Clearly, investing in an ARF is not without its risks. Furthermore, if part of the portfolio is held in cash to meet the needs of imputed distributions, the return from the non-cash part needs to be that much higher to meet the overall return objective. (cash drag)

If you need withdrawals from your ARF to maintain your required lifestyle and the withdrawal rate is close to the annuity rate that could currently be secured, you are only going to be able to maintain this income level if a higher level of investment risk is taken.

The decision to invest in an ARF is not a simple process and we believe that it is very important for clients to fully understand all the risks that they face.

Equally, it is essential to appreciate that if you pursue a cautious investment strategy (such as investing in a deposit account) with an ARF you will almost certainly fail to meet the critical yield requirement and might actually find out that you would have been better off with the purchase of an annuity (depending on how long you live).

This problem is much too complex to have a single solution for everyone. Relevant factors to consider include; the expected time horizon, the tolerance for risk, the desire for smooth consumption from year to year, and the desire to leave a bequest will each have an impact on the outcome.


While there is no single answer, there are several principles which apply uniformly:


• Investors are more likely to maintain living standards in retirement if they have low spending rates and reasonably large stock allocations within their portfolios. A long retirement coupled with a low stock allocation translates into a high probability of declining consumption.

• Insisting on a very high degree of “smoothing” of income from one year to the next (i.e. maintaining a relatively constant income) is a recipe for disaster. Imputed distributions are based on 4% or 5% of the remaining fund value and therefore does not subject the fund to this risk.

• For shorter time periods, higher spending rates may be justified. However, even over these shorter periods, higher spending rates increase the probability of declining consumption in the future.

• Expected bequests are higher for portfolios with high stock allocations, but so is the likelihood of leaving a small bequest. This is a classic risk/return trade-off.

Wollie said:

ask @Marc where he would advise a client to invest an ARF. He sure as hell would not be advising them to put their all in the Irish Life Consensus Fund. He would be advising them to put a high proportion of it in bonds and other "low risk" assets - after showing them lots of fancy graphs, of course.

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Good old @Marc I knew you wouldn't let me down, that you'd be sure to produce a graph or two - or three or more. Not sure what they mean, but that's irrelevant. They always look good.

Steven Barrett said:

It is so popular because a well know advisor, Carl Richards, launched a career on what he coined The Behavior Gap.

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I Googled the guy. All I can get is adverts for his books. No discussion on his thoughts. I suspect that my initial reaction that the contradiction in this graphic will not withstand any serious scrutiny is reinforced. I would worry that someone who "likes" this may already be using it as a sales tool. Can you point to any serious discussion on this message?

Duke of Marmalade said:

I Googled the guy. All I can get is adverts for his books. No discussion on his thoughts. I suspect that my initial reaction that the contradiction in this graphic will not withstand any serious scrutiny is reinforced. I would worry that someone who "likes" this may already be using it as a sales tool. Can you point to any serious discussion on this message?

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That image was based on the Dalbar survey. His work is in the area of behavourial finance and people's attitudes and treatment of money. You can read his articles in the New York Times at https://www.nytimes.com/by/carl-richards

I don’t accept the criticism of Dalbar’s work (and they also reject the criticism).

Of course it’s going to be a comparison between ‘time weighted’ and ‘money weighted’.

The whole point is that they’re looking at the outflows and inflows for ‘self-managed’ money vs just being in the market.

Examples where all of the returns arose in one year of the 20 are just noise and a red herring.

The person who just invested and stayed the course was there for that, some other might not have been.

Dalbar are just doing their best to create something.

Marc said:

there is also plenty of evidence during my quarter century actually advising clients that clients working with an adviser typically do better than those without

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I would be genuinely interested to see any quantifiable data that demonstrates that advised investors typically earn higher returns than DIY investors, net of all costs.

The Dalbar survey is misleading nonsense (sorry Gordon), so let's leave that to one side.

I am sceptical that simply exhorting clients to "stay the course" during market corrections has any real impact on clients. But if I am wrong in that regard, can you point me to any quantifiable data that demonstrates the impact?

Don't get me wrong - I do think that advisers can provide a valuable service to clients in terms of financial planning and portfolio construction. However, I have yet to see any evidence of "adviser alpha" in terms of observed portfolio returns.

Sarenco said:

I would be genuinely interested to see any quantifiable data that demonstrates that advised investors typically earn higher returns than DIY investors, net of all costs.

The Dalbar survey is misleading nonsense (sorry Gordon), so let's leave that to one side.

I am sceptical that simply exhorting clients to "stay the course" during market corrections has any real impact on clients. But if I am wrong in that regard, can you point me to any quantifiable data that demonstrates the impact?

Don't get me wrong - I do think that advisers can provide a valuable service to clients in terms of financial planning and portfolio construction. However, I have yet to see any evidence of "adviser alpha" in terms of observed portfolio returns.

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I'm not sure if you will find it because it may not exist. As in all industries, there are people who can do it themselves and those that can't. People who are confident and knowledgable of investing make have bigger returns net of costs because they don't have to pay someone (although they do have to spend time). But those who don't know what they are doing will certainly benefit from working with a good advisor. They are the kind of people who don't understand risk and will move to cash at the first instance of bad news and having a good advisor may help talk them off the ledge.

I know I will certainly benefit from a builder who will do DIY in my home and am happy to pay for it. Lots of people are capable of doing it themselves and are happy to spend the time on a DIY project. Same with personal finance.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

Gordon Gekko said:

I don’t accept the criticism of Dalbar’s work (and they also reject the criticism).

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For some reason beknownst only to yourself you refuse to accept that their math was totally in error. We will have to park that one. But the following extract from Dalbar's "defence" is worth repeating.

Dalbar's defence said:

The initial Dalbar critique:
“…to convince clients and prospects that they will earn significantly higher investment returns through professional management of their portfolios.”

The Dalbar defence:
There is no basis for assigning this purpose. At no point has this study stated or implied that the difference in returns had anything to do with professional management.

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This is a discussion as to whether the charges for professional advice on ARFs are justifiable. Of what relevance is a faulty report which even its authors say has nothing to do with the efforts of professional managers?

Page 4 of vanguard pdf 'The buck stops here: Vanguard money market funds Vanguard research February 2019 Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®''

[broken link removed]

has a table showing how advisors can increase return.

Behavioural coaching is listed at 150 basis points

SPC100 said:

Page 4 of vanguard pdf 'The buck stops here: Vanguard money market funds Vanguard research February 2019 Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®''

[broken link removed]

has a table showing how advisors can increase return.

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I have a sneaking suspicion about where this sits on the marketing material vs peer reviewed independent research spectrum.

time to plan said:

I have a sneaking suspicion about where this sits on the marketing material vs peer reviewed independent research spectrum.

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Why?

What % do you think being an active member of Askaboutmoney adds to the person’s annual returns?

It is significant I’d contend.

Similarly, if I didn’t have a reasonable grasp of what to do myself and I went to, say, Steven Barrett for ongoing advice, I would estimate that he’d ‘make’ my family and I a very significant amount of money over time.

It’s almost as if people have been blinded by the various high profile chancers and pillar bank horse manure that’s been shipped into people’s portfolios over the years. In reality, having a good financial adviser or wealth manager is like having a good doctor, lawyer, or accountant in your life. They’ll save you a fortune and justify their fees many times over.

I am not a financial adviser, but I really don’t like the way they’re sneered at and in some ways looked down upon on this site, almost as if the work they do isn’t hugely valuable.

If I hadn’t a notion, and my adviser had me in high risk Zurich Prisma funds with a 0.75% fee plus 0.25% for him, and extra allocation every five years split between the two of us, I’d do very well. Yet there’d be people here whinging about Vanguard ETFs and the potential to pay 0.2% per annum.

1) US ETFs can’t be bought directly anymore; people need to stop obsessing about them
2) The Venn diagram of AAM members and Joe Public is two separate circles
3) Joe Public hasn’t a notion about any of this stuff

Gordon Gekko said:

Why?

What % do you think being an active member of Askaboutmoney adds to the person’s annual returns?

It is significant I’d contend.

Similarly, if I didn’t have a reasonable grasp of what to do myself and I went to, say, Steven Barrett for ongoing advice, I would estimate that he’d ‘make’ my family and I a significant seven figure sum.

It’s almost as if people have been blinded by the various high profile chancers and pillar bank horse manure that’s been shipped into people’s portfolios over the years. In reality, having a good financial adviser or wealth manager is like having a good doctor, lawyer, or accountant in your life. They’ll save you a fortune and justify their fees many times over.

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I'm not arguing that. I'm saying that Vanguard 'research' is not a reliable evidence source.

Steven Barrett said:

I know I will certainly benefit from a builder who will do DIY in my home and am happy to pay for it.

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Of all the claims and counter-claims on this thread, this one has me rightly flummoxed?!

time to plan said:

I'm not arguing that. I'm saying that Vanguard 'research' is not a reliable evidence source.

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Why not?

Forget that though.

Do you think that if Marc, Steven Barrett, Brendan, Sarenco, or myself “caddied” for a member of the public from a financial perspective for a period of 10 years, that the person would do better or worse than if they were left to their own devices?

These studies are stating the bloody obvious!

A punter does better when they get advice! Wow…stop the presses!

Next you’ll be telling me that people who go to the dentist regularly have healthier teeth!

But, oh no, the study that says as much is from the Irish Association of Dentists…sure they would say that!

Gordon Gekko said:

Why not?

Forget that though.

Do you think that if Marc, Steven Barrett, Brendan, Sarenco, or myself “caddied” for a member of the public from a financial perspective for a period of 10 years, that the person would do better or worse than if they were left to their own devices?

These studies are stating the bloody obvious!

A punter does better when they get advice! Wow…stop the presses!

Next you’ll be telling me that people who go to the dentist regularly have healthier teeth!

But, oh no, the study that says as much is from the Irish Association of Dentists…sure they would say that!

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You’ll probably find independent peer reviewed evidence that going to a dentist regularly leads to better teeth.

I am interested in whether there is reliable evidence as to whether engaging a Financial professional leads to better financial outcomes. You have a hunch that it does. So do I. But that is not the same as evidence.

time to plan said:

You’ll probably find independent peer reviewed evidence that going to a dentist regularly leads to better teeth.

I am interested in whether there is reliable evidence as to whether engaging a Financial professional leads to better financial outcomes. You have a hunch that it does. So do I. But that is not the same as evidence.

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How does one prove it though when people debunk anything that’s out there?

I have more than a hunch…it’s obvious that it does.

Find me proof that using a proper builder to renovate your house leads to better outcomes than doing it yourself…